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Grain, oilseed markets brace for 'critical' crop data

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How important for world grain markets is the crop data the US Department of Agriculture will release on Friday?

"It's critical," according to crop scout Michael Cordonnier.

"You have got the biggest grower of corn and soybeans, the US, suffering its worst drought for 50 years, and how you reconcile that with production, and the level of rationing all the various types of consumers will take."

Friday's Wasde world crop supply and demand estimates report, and its sister briefing, World Agricultural Production, represent "two of the most important reports we have had for a very, very long time," Dr Cordonnier, at Soybean and Corn Advisor, said.

"They will have repurcussions thoughout the world."

'Stout and bullish'

There is always the possibility of the USDA producing estimates in line with market forecasts of a corn yield falling to a 15-year low of 127.3 bushels per acre, and of US inventories ending 2012-13 at 660m bushels.

Array

in Wasde, and (existing USDA forecast)

Yield: 127.34 bushels per acre, (146.0 bushels per acre)Harvested area: 86.40m acres, (88.9m acres)Production: 11.026bn bushels, (12.970bn bushels)Year-end stocks: 660m bushels. (1.183bn bushels)Year-end stocks 2011-12: 924m bushels. (903m bushels)Source: ThomsonReuters

"There is the possibility that the market could take a look at the data and go back to trading the weather," Jason Roose at broker US Commodities said.

"People are anticipating low crop estimates."

That said, even if rain does continue to appear in the forecast, "I do not see the market, one of the most stout and bullish weather markets in history, changing that much", despite holding some potential to revive yields on late-planted crops, Mr Roose said.

'Worse than 1988'

But the number of moving parts gives plenty of cause to expect surprises.

For instance, there are not just the yields to think about, but the proportion of crops which make it to harvest, a figure which, for corn, analysts on average put at 86.4m acres, but Dr Cordonnier foresees at 83.0m acres.

At the forecast yield of 127.3 bushels per acre that is, in production terms, a difference of more than 400m bushels to juggle with.

His assessment is based in part on the idea that, with generous crop insurance, there is little incentive for farmers to harvest low-yielding crops, and in part of the idea that "this drought is worse than in 1988", the year investors are viewing as an analogue to 2012.

"The drought has a bigger footprint, it is longer lasting," he told Agrimoney.com, estimating the abandonment rate at 14%, compared with 13% in 1988.

While genetically modified varieties may have improved crops' ability to withstand shorter periods of poor weather, "nothing can withstand months without rain, with 100 degrees Fahrenheit temperatures".

Two ingredients

A consideration of the methodology the USDA has used ahead of the data reassures of the level of research behind the briefing, but poses its own questions too.

Array

in Wasde, and (existing USDA forecast)

Yield: 37.75 bushels per acre, (40.5 bushels per acre)Harvested area: 74.80m acres, (75.3m acres)Production: 2.817bn bushels, (3.050bn bushels)Year-end stocks: 112m bushels. (130m bushels)Year-end stocks 2011-12: 158m bushels. (170m bushels)Source: ThomsonReuters

The programmes the field research will be plugged into "will assume it is a normal year and that there is normal development, when in fact there will not be.

"Overall, I think the USDA will overestimate the corn yield because I think the crop will end poorly, which will not be fully accounted for."

'Variable in capital letters'

An extra difficulty, as Mike Mawdsley at broker Market 1 said, based in top producing state Iowa, there is particular variability among crops this year, making assessment of the national picture difficult.

"That is variable in capital letters. There are crops which look good, but did not pollinate. There are differences depending on types of ground. Crops on sandy ground are lost.

"But there are big differences even from one end of the field to another."

'Nearly fell off my chair'

So will a higher level of subjective thinking slip into the USDA's thinking this time?

The department, for instance, is already said to be tweaking its yield forecasting to account for the risk of poor development.

And, if it the USDA does see more up for argument, where will that lead?

"The USDA are not going to want to come up with a yield number which is too generous, depress prices and see all the importers come in and buy our corn, and leaving us at the end of the season with nothing left but vapours," Mr Mawdsley said.

And after all, in the July report, when the USDA dropped its yield forecast to 146 bushels per acre, it was more aggressive than the market had expected.

"I nearly fell off my chair when I saw that number," he said.

Dr Cordonnier, highlighting the USDA's trial to "finesse the numbers to make the balance sheet work" said that low production "would be very painful, but the pain might end quicker that way".

The alternative was to end up like Brazil, which is, unusually, turning to soybean imports after "front loading exports and producing less than anticipated. Now they are out".

Not peaked yet?

Whatever, in Mr Mawdsley's analysis, it is too early anyway for the market to have peaked to judge by chart signs.

"Prices have been sitting around record highs for three weeks," he said.

"Markets generally top not top while sitting in consolidation mode. There is typically a violent move up, then bang.

"We might see something higher, perhaps $9-9.50 a bushel in corn."

By Agrimoney.com

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